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Starbucks Changing How Consumers Pay

Starbucks customers are increasingly reaching for their smartphones to pay for their morning jolt. As the following article reports, the Seattle barista has outdistanced other mobile pay apps by a wide margin.

There were plenty of reasons for skepticism when Starbucks rolled out its digital ordering system nationally in September 2015. EBay had already rolled out a location-based system that recognized customers as they walked in the door. Consumers were not particularly impressed; eBay eventually spun off its PayPal unit. Apple Pay, meanwhile, was launched in 2014 as a faster, more secure method of payment. Merchants weren’t enthused. Many never activated the feature. But Starbucks (ticker: SBUX) was still betting that its customers would jump at the chance to preorder coffee and food for pickup at a nearby store.

Sure enough, the company’s mobile order-and-pay feature has become a major hit, one more example of Starbucks’—and coffee’s—universal appeal. The preorders have actually created bottlenecks at Starbucks’ counters, as pickups collide with in-store orders. The company is rethinking store layouts and hiring preorder specialists to handle the demand.

In the latest quarter, 9% of Starbucks’ U.S. orders were placed in advance. Moreover, nearly a third of all Starbucks’ orders were paid for via the company’s phone app. The numbers are remarkable when you consider the Apple (AAPL) comparison. Today, even in stores where Apply Pay is available, barely anyone is using it. Given the opportunity to check out with Apple Pay, only 5.5% of iPhone users actually choose the option. Starbucks has changed consumer payment behavior in a way that should inspire envy in Silicon Valley.

Starbucks identified the smartphone revolution years before most bricks-and-mortar firms, and the technology still holds big promise in boosting sales over the long term. “The kind of growth and financial performance we are seeing out of customers with whom we have digital relationships blows the socks off of anything Wall Street would possibly want to see,” Matthew Ryan, Starbucks’ global chief strategy officer, tells Barron’s.

Starbucks’ ability to integrate its mobile pay app with its customer loyalty program has been the key factor in the program’s success. When a merchant can provide a seamless payment, convenience, and frequent, targeted marketing offers, customers become highly engaged and keep coming back for more. Additionally, the mobile order ahead and pay feature has become a new sales channel. Waiting in line may become a distant memory.

Overview by Raymond Pucci, Associate Director, Research Services at Mercator Advisory Group